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It's An Easy Business

Agency principals ask us all the time how to measure the financial success of their agencies. When we respond, many seem disappointed. "That's it?" they ask. "Those are all the numbers you track?" The truth is, the agency business is a pretty simple business. Following are the most important metrics for agencies.

P.S. Cut this out and hang it near your desk. Close scrutiny each month will make a significant difference in your bottom line profits.

Income Statement

  • AGI (GP) – Shoot for 40-45% of billings based on how much media you place in ratio to billing.
  • Payroll – Including benefits, employers' FICA and what a working owner takes in regular pay. Payroll should be no more than 50-55% of AGI. Remember to count your regular freelancers in employee salaries as it relates to metrics.
  • Bodies – 1 to 1.5 people per $125,000-$150,000 in AGI
  • Net Operating Profit – 25% of AGI


Balance Sheet

  • Assets – 15% in cash or equivalents
  • Accounts Payable – No more than 35% of liabilities
  • Accounts Receivable – 50% of assets
  • Fixed Assets (furniture, cars, computers, etc.) – 25% of assets
  • Net Worth – 30% of assets, but may vary in an "S" corp.
  • Long- and Short-term Debt – No more than 15% of liabilities
  • Liquidity in your agency should be about 2 to 1.


Client distribution*

No more than one client that comprise more than 25% of your AGI.
No more than two clients that each comprise more than 12.5% of your AGI
No more than four clients that each comprise more than 6.25% of your AGI
No more than eight clients that each comprise more than 3.125% of your AGI

* This formula may be a little too rigid, but you get the point.

Client Profitability
Look at each client on a monthly basis the same way you look at the total financial statement. Each client is presented each quarter in the following way:

Total Billings minus Direct Costs
equals
Client AGI
minus
Apportioned Overhead Based on Volume
equals
Client Operating Profit

The old adage is still true; 80 percent of your agency’s income comes from 20 percent of your clients. Think carefully about who you want to do business with.

Job Costs
Scan individual projects to see if the estimate and actual prices are close. Most agency management software enables you to do this very easily. If you take care to estimate your projects and post estimates to the billing worksheet, then record all hours, buy-outs and miscellaneous costs, you will begin to see the estimate v. actual trends. Principals don’t have to look at every project, but AEs should. In fact, it is a good practice for AEs, creatives and the traffic manager to review financial status on projects at the morning traffic meeting. It is important to make sure the estimating categories and the billings categories are aligned.

Employee Productivity
Because hours billed is the key to employee success, you should utilize an employee productivity tracker. This kind of report will give you a look at each employee's productivity each month. When you see an employee fall below a certain level (75% billable—1,600 hours per year), you should have a conversation with them, and set some goals to help improve productivity.

Margins
Margins on services bought on the outside such as printing, photography, illustration, etc., should be in the 25-30 percent range. We know this is difficult to achieve in today’s procurement-driven client environment, but fight for the extra value your agency provides and your right to be paid for providing it. If brokering services is a shrinking part of your income, figure out how to charge more based on value.

Average Collection Time
Average collection time for invoices should never exceed 45 days. Aim for 15-30 days whenever possible. Tighten up collection practices.

Comments

1 comment
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7 years ago

Very helpful metrics.  Thank you.

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